June 7, 2020
How Do You Value a Dental Practice?
While it may seem as though you can value your practice by simply taking a “x” percentage of your collections, it is not that cut and dry. Furthermore, because there is no Multiple Listing Service (MLS) for dental practices, you cannot value a practice by reviewing market comparisons. There are many details considered when determining the value of a dental practice. That’s why it is imperative to have a comprehensive practice appraisal conducted for your practice. Here’s all you need to know about valuating a dental practice.
Why do I need a valuation?
A detailed valuation/prospectus will help you to understand the current value of your practice and give you a roadmap about options and opportunities within your practice. It will also include ways to increase practice profitability and value.
By understanding the current standing of your practice, you can make an educated decision on its future. For instance, is it the right time to sell? Is the practice healthy enough to support an additional doctor full time? Is your practice attractive to a group with which you can affiliate? Is your practice healthy enough to allow you to expand and acquire additional offices to build your empire?
Get the facts
Almost every firm that offers valuations or appraisals will most likely come to a similar value, with different ways of getting there. What makes the appraisal or valuation good is how close they are to how a bank or dental service organization (DSO) would value your practice. While you may believe your practice should be valued higher because of its growth opportunity, a bank will not lend on potential. For this reason, it is important to use a reputable company for your appraisal. This will allow you to work with accurate numbers and facts rather than ballparks and hypotheticals.
What will affect my practice value?
Because no two practices are identical, it is important to understand the different factors that can affect your practice value. The following considerations will play an important part when determining your practice’s fair market value:
- Location: When deciding the multiplier to use for a practice, location is important. Not only is the city and state a major factor when measuring desirability, but the practice visibility within your city is also a key component. Is your practice located in a rural, slow-growing area? Or is it in a booming metropolis that has seen consistent growth through the years? Is your office in a medical complex with little or no signage? Or are you in a retail center or standalone building?
- Practice type: The type of dental practice you own will affect the value of your practice. A general dentistry practice tends to receive a greater multiple than a specialty practice because of more secure revenue sources and a lack of dependency on referral. To put it simply, a specialist does not “own” their patients as much as a general dentist does.
- Active patients: While not heavily weighed, the number of active patients within a practice is also factored in when determining a practice’s value. It is important to note an active patient is considered someone seen within the past 12 to 18 months, even if the individual was only seen once.
- Growth potential: A bank generally will not loan primarily on what a practice can do, but the growth potential is factored in determining the value. Is there opportunity to add more treatment rooms to your space? Is your city growing? Is there a new complex being built next door that will drive additional patients?
- Patient attractions and retention rates: Each valuation should consider the number of new patients the practice sees on a monthly/annual basis. In addition, are you retaining your patients, or do you have a high attrition rate?
- Reason for practice sale: While it may seem unfair, the reason you are selling your practice can also play a part in the value it is given. For example, are you selling because you are suffering from a medical condition that doesn’t allow you to practice? This type of event can affect the value because the practice will see declining revenues each day the doors are closed.
- Projected patient retention after practice sale: When investing in an established practice, one factor always considered is if the new owner can expect patients to stay after the change. If a high attrition rate is expected due to the previous doctor relocating a few miles away or the practice has a heavy Delta Dental Premier patient base, the value will be slightly affected for the worse. For this reason, if a higher retention rate is expected (i.e., the current doctor plans to stay on for a while), a higher multiple will be used.
- Dental equipment: Even though the value of hard assets is not weighed heavily when determining a practice’s value, it is taken into consideration. The equipment value will not be what an insurance company assigns or what you paid for the equipment. It will be based on the resale value (as seen if sold on eBay or Atlas Resell Management). Therefore, the age and condition of the equipment and the technical advancements will play a factor.
- Office condition: The condition of the office is considered within the practice value. While it is not advised that you do a complete renovation before selling, you will want to make sure it is somewhat aesthetically pleasing. If a buyer must account for a total gut renovation of the space, the value of your practice will be affected.
- Practice revenue trends and profit margin: The practice value is significantly influenced by revenue trends of the past three years, with the most recent year being weighed the heaviest. For this reason, it is important not to drop production as soon as you decide to sell. Doing so will hurt your practice value. In addition to revenue trends, your profit margin is heavily considered. Accurately determining a practice’s profit margin takes a high level of skill and expertise in the dental industry. Therefore, it is imperative you use a professional who specializes in reviewing dental practices.
What will not affect my practice value?
Here are some factors that will not affect the value of a dental practice:
- Accounts receivable (A/R): While some companies may factor A/R into your practice value, it is not good practice. A practice’s A/R is constantly changing, sometimes by the day, by the hour and even by the minute. For this reason, the A/R will not be calculated until the day of closing. It is up to you, the seller, to decide if you would like to collect on your A/R personally or sell it along with the practice. Regardless of your choice, a reputable broker will not charge off the A/R. A good rule of thumb to estimate the value of your A/R is to take 85% of the total.
- Patient overview: Even though the patient overview will not contribute to your practice value, it is still recommended to understand how your patient base is broken up. For this reason, you should not only know your active patient count and the number of patients in recall, but also know patient demographics.
- Insurance: The insurance plans you accept, as well as the percentage of patients on these plans, typically does not factor into your practice value, unless your practice is heavy Medicaid or the majority of patients are in network with Delta Dental Premier.
What information is needed to determine my practice value?
Several pieces of information are necessary when determining a practice’s value. While the list may appear overwhelming, it should only take about 45 minutes to gather all materials needed. This list includes:
- Three years of profit-and-loss statements (P&Ls)
- Three years of tax returns
- Current balance sheet
- Production broken down by provider
- Production broken down by procedure type
- Total active patients
- New patients per month for the past 12 months
- A/R aging report
- Copy of current lease (if applicable)
- Employee Rroster with hire dates and hourly wages and benefits
- Bio of selling dentist
- Physical observation of office with pictures of equipment (typically performed by PTS staff)
- Lists of insurance plans
- Office hours
As mentioned, it is vital to understand the value of your practice before deciding your practice’s future. If you don’t, you will not fully understand your options and will inevitably make an uneducated decision that can affect your entire future. For this reason, it is advised to reach out to a reputable company to perform a valuation for your practice.
For more information about buying a dental practice or selling a dental practice, contact the experienced team at Professional Transition Strategies.